Retrenchment compensation is the statutory payment owed to a worker whose employment the employer ends for reasons other than punishment, such as redundancy or a business slowdown. Under the Industrial Relations Code, 2020 it is 15 days’ average pay for every completed year of continuous service, with a part year of more than six months counted as a full year.

What the Code requires

Section 70 applies to a worker with at least one year of continuous service. Before retrenching, the employer must give one month’s written notice stating the reasons (or pay wages for that period instead), pay the compensation at the time of retrenchment, and serve notice on the appropriate government in the prescribed manner. The statutory notice is one month, not 60 days. Where the establishment has 300 or more workers (it was 100 under the old Act), Chapter X applies instead: prior government permission is needed, the application has to be made at least 60 days before the intended date, and the notice to the worker is three months or wages in lieu. Check the Central Rules (notified 8 May 2026) and your state’s rules before acting.

“Average pay” for a monthly-paid worker is taken over the three complete calendar months before the date it falls due. Only “workers” are covered. Managerial staff and supervisors above the Code’s monthly wage limit are outside it, so their severance is contractual. Fixed-term contracts that end on expiry, superannuation, voluntary retirement, continued ill-health and disciplinary dismissal are not retrenchment.

Worked example, and the extra reskilling payment

A worker with average monthly wages of Rs 24,000 has 8 years 7 months of service. The 7 months exceed six, so it counts as 9 years. One day is taken as Rs 24,000 / 30 = Rs 800, so 15 days is Rs 12,000, and compensation is Rs 12,000 x 9 = Rs 1,08,000. Dividing by 30 is common practice, but the Code says only “average pay”, so confirm the method in your policy.

Two more amounts sit on top of this, all shown in the final settlement statement. One month’s notice pay in lieu is Rs 24,000 if notice is not worked. Under Section 83 the employer also contributes 15 days’ last drawn wages (here Rs 12,000) to the Worker Re-skilling Fund; per the Central Rules, as summarised by PRS, this goes to a government-maintained account within 10 days and reaches the worker within 45 days. It is over and above retrenchment compensation, not a part of it.

Frequently asked questions

How is it different from layoff compensation?

A layoff is a temporary inability to give work, and the worker stays employed. Layoff compensation is 50 percent of basic wages plus dearness allowance, subject to limits. Retrenchment ends the job.

Is it paid in addition to gratuity?

Yes. Gratuity comes from a separate scheme and usually needs five years of service, while retrenchment compensation needs one year. A retrenched worker can qualify for both, settled together in the full and final settlement.

Is retrenchment compensation taxable?

Workmen get an exemption, capped and formula-linked, under the 1961 Act for FY 2025-26. The Income-tax Act, 2025 applies from tax year 2026-27, so confirm the new section. Other settlement items are taxed separately, as on the leave encashment tax page.

Run your own figures in the Retrenchment Compensation Calculator.